I often get asked about how to financially structure a partnership. Unfortunately, I also hear about many partnerships breaking down or experiencing issues because of discontent about the financial arrangements/structures in the partnership.
To me, the vast majority of the time, issues arise because either one or both of the partners don’t have an appreciation for the basics of business. The partnership issues around financial split that happen in dental practices would honestly be laughed at by everyone in the broader business world. But for dentists it seems a very complex issue to grasp…
Let me start by using a hypothetical scenario where NEITHER partner works clinically or otherwise in a practice owned by two people.
It was started a few years ago by the two owners and has built up well with two associates working there.
Let’s say it’s billing $1,000,000 a year and there are two dentists employed there (not the owners). Each bills $500,000 a year. They get paid 40% so each gets $200,000 (for simplicity, there are no lab bills in our hypothetical practice). Expenses are paid with the leftover 60% and then after expenses $200,000 profit is left over which is split between the two owners 50/50 so they get $100,000 each.
Seems pretty simple and straight forward right? That’s because it is. This is how it should work.
Now let’s take another hypothetical scenario.
In this one both the owners work there with the figures the figures exactly the same as the above except the two owners do the billings. Now each owner earns 40% commission and gets $200,000 each. They also get $100,000 each of the profit that’s left over.
Again, pretty simple right? Yep. Easy.
Now onto the third hypothetical scenario.
Two owners start a practice and they both work in it. First year it bills $500,000 total. They each bill $250,000. Second year, it bills $700,000 and each bills $350,000. In the third year, one partner falls pregnant and decides to take the entire year off to give birth and raise her child. They get a part time associate dentist who bills $200,000 and the other owner bills $800,000 for a total of $1,000,000 in billings. The pregnant partner didn’t work and billed zero.
What’s the financial split? This should be very easy still but somehow this scenario and other very similar variations just completely mess with dentists minds. Honestly, I think in the last ten years, I’ve been asked questions about this from over 100 dentists. I’m not exaggerating.
Some of the statements I hear:
“I’m doing all the billings and the other partner is doing nothing, why should they get any profits?”
Or let’s say they decide to sell the practice a thing I will hear “I’m doing all the billings and it’s because of me, this practice is worth this much so I should get a greater share of the sale proceeds”.
Or let’s say one partner not only does the bulk of the billings but they also do management tasks, I will hear statements like “the other partner does nothing and I am running everything – it’s bullshit they just make money for doing nothing”.
Firstly, let’s look at the third hypothetical and go back to the very first hypothetical. How would it be different if two dentists worked at the practice billing $800,000 and $200,000 with neither owner working? The profits would be $200,000 still and it would be split evenly right?. Why then, is it clouded with you being in one owner doing $800,000 and the other not working?
I’ve realised over the years that dentists struggle to understand this scenario and it causes problems because they lack a very simple understanding of the difference between dentist and business owner. If, as a dentist working in your own practice, you are paid at a fair market rate, then that’s all the reimbursement you are entitled to for clinical work. That’s it. If you billed $800,000 and your partner billed zero, you got paid 40% ($320,000). They got paid zero from the billings. That’s your compensation for working. You are entitled to nothing more and nothing less for the clinical work you did. The surgery has profits of $200,000 and this goes to the OWNERS of the business. It’s split 50/50. It doesn’t matter if one of the owners did more dentistry (clinical billings) than the other, as owners they are on an even footing. They both took equal risk, they both own half the business each and each was reimbursed the fair market rate for the clinical work.
The same applies to growth in the value of the business. Each owns 50%. It doesn’t matter how much each works or how much each contributes to the billings. It’s 50/50 for the value of the business.
In part two of this, I’ll talk about how remuneration for practice management tasks should be handled. This is another area that causes problems.
Please feel free to comment or add to the discussion. If you have enjoyed this post, please like, share or comment below.
Our next practice ownership seminar is coming up in Sydney in March next year. It is now open for registration. We cover this topic and go into further depth as well as provide much more information on everything to do with buying or starting-up a dental practice, these seminars have sold out in previous years so please register ASAP.
We also offer a practice purchase assessment which will do this analysis for you as well as other expert guidance in various areas of practice ownership. Please see the below link for more information.